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Daily Newsletter, Saturday, 1/28/2012

Table of Contents

  1. Market Wrap
  2. Index Wrap
  3. New Option Plays
  4. In Play Updates and Reviews

Market Wrap

Calm Before the Storm

by Jim Brown

Click here to email Jim Brown

Another Friday with Greece hogging the headlines and Portugal waiting in the wings to take the spotlight as the next EU country to move into crisis mode.

Market Statistics

Greece is continuing down the road towards a default with another week behind us and still no resolution on the private sector debt swap. The daily claims of "we will have a deal before the weekend" did not pan out on Friday.

The bond vigilantes are not waiting around for the announcement and have taken aim at Portugal as the next country to potentially default. Portugal already received a 78 billion euro bailout but conditions are still worsening. While Greece, Italy and Spain have been able to sell debt at lower rates thanks to the ECB LTRO loans, Portugal has seen the value of its debt plunge and interest rates rise. Rates on the 10-year bond have risen to 15% and a level that is not sustainable. The 2-year now yields 16.7% and 5-year 20%. S&P cut Portugal's rating to junk two weeks ago. There is currently a 70% chance Portugal will default over the next five years. Citi economic analyst, Michael Saunders, said Portugal will eventually face a private sector haircut of 35% or more by the end of 2012 to early 2013. Portugal is expected to soon ask the ECB, IMF and EU (troika) for another 30-50 billion euros.

Greece is moving ever nearer to a default with 96% of analysts now expecting it and Portugal is heading rapidly towards its own default scenario. The new EU fiscal compact is facing numerous problems. So, why has the euro currency risen +5% and the dollar declined -3% over the last nine days? You can thank the Fed for this move. The regional activity reports suggested the recovery was slowing and the Fed basically confirmed trouble ahead when they extended their low rate pledge to late 2014. There is no reason for the Fed to take that extraordinary step unless they fear the fragile recovery is going to stall. In his press conference Bernanke alluded to another QE program in the near future "if conditions were appropriate to stimulate the recovery." Since they just announced in the FOMC statement conditions warranted "exceptionally low rates" until late 2014 the jump to the "appropriate conditions" conclusion was obvious. All we need now is for the equity market to take a dive and put the Fed into panic mode and make a QE3 announcement before the March FOMC meeting.

Dollar Chart

Euro Chart

The falling dollar has pushed the precious metals through strong resistance and out to new two month highs. Silver is up +22% for the year and gold +11%. Copper rallied to a four month high on the falling dollar and also on the Fed's low rate forecast. That boosted expectations for an economic recovery and increased demand. Copper supplies at the London Metal Exchange fell by 2,450 tonnes to 335,425 tonnes and their lowest level since September 2009.

Gold Chart

Silver Chart

Copper Chart

The falling dollar may be the only thing holding equities at their highs. Earnings have been less than exciting with many companies beating on earnings but guiding lower for 2012. That has caused some spectacular volatility in the individual stocks. For instance the earnings for technology sector ex-Apple are actually down -2.9% for the quarter according to FactSet. Including Apple the earnings would be up +11.9%. That shows you what a big impact Apple has on sentiment. I would bet 99.9% of investors are looking at the headline reports of +11.9% earnings growth for techs and thinking this was a decent quarter. How do you think tech buyers would feel if they realized the rest of the sector was negative for the quarter? Including Apple and AIG the overall earnings growth for the S&P drops to +1.0% without those companies. That is the blended growth rate. That is companies already reported plus estimates for those yet to report so there is still plenty of room for further declines since the remaining 300+ S&P companies are the smaller ones with less revenue and earnings flexibility. Most are not buying back billions of dollars in shares for the quarter to increase earnings per share as IBM and others did. You are not hearing on CNBC that S&P earnings growth is only +1.0% ex Apple & AIG. That would be the end to the rally.

Current earnings estimates for 2012 are positively anemic. For Q1 earnings growth is estimated at only +1.2%, Q2 +7.8% and Q3 +5.2%. Q4-2012 jumps back up to +16.7% and Q1-2013 at +15.4%. Good luck with that crystal ball for Q4 2012. The estimates for Q4-2011 were right at +15% at the beginning of the quarter and now we will be lucky to finish positive without Apple and AIG.

Despite the volatility and the wide range in beats and misses the overall earnings actually improved last week. Of the 172 S&P companies already reported 65% beat the consensus estimates. Financials posted the highest growth rate at +60.4%, technology (including Apple) at +11.9% and industrials at +10.6%. The current 12-month forward PE for the S&P is 12.4 and well below the 14.7 average for the last ten years.

On the economic front the first look at the Q4 GDP came in below estimates. The headline number showing +2.75% growth was less than the consensus of +3.0%. That was definitely better than the +1.81% growth in Q3 but it may not last. The drag in Q3 was due to inventories and that was the same factor that pushed Q4 growth higher. Unfortunately that positive push will return as a drag in the first half of 2012. Fixed investment also slowed as did government spending. Consumption (Real GDP) provided only +1.45 of the headline number and inventories added +1.94 points. Exports subtracted -0.11 and government spending cuts subtracted -0.93 points.

Of note was the decline in inflation as evidenced by the PCE to +0.9% from the 2.1% level in Q3. Excluding food and energy the rate fell from 2.3% to 0.7%. For the Fed this is nearing crisis levels. They don't want to see zero inflation or even worse negative inflation or deflation. This is another clue the Fed is going to announce some new QE program in the near future.

GDP for all of 2012 is expected to average 2.5% and grow to 3% or more in 2013, 2014 and 2015. I would not hold my breath on that. Once the global economy begins growing again the price of oil is going well over $100 and anything close to $125 will weigh on global growth. The world runs on cheap oil and cheap oil is nearly gone.

Despite the rebound in GDP in Q4 I should remind everyone that the prior three quarters all had growth of less than 2%. There are NO instances in history since WWII where three quarters of sub 2% GDP growth did not predict a recession. Of course there is a first time for everything. This is likely another reason Bernanke extended the low rates.

GDP Chart

The final revision for January's Consumer Sentiment rose to 75.0 from 74.0 in the initial release. This was a strong gain over the December level at 69.9. Sentiment has been improving significantly since the cycle low of 55.7 in August. It is very close to a breakout to a post recession high. The current conditions component rose from 79.6 to 84.2 and was responsible for the gains. This is more than likely due to the market rally and its impact on individual wealth and retirement accounts.

Consumer Sentiment Chart

We have a full economic calendar for next week with the ISM reports and payroll reports hogging the headlines. The major reports begin on Wednesday with the ADP Employment and ISM Manufacturing. Last month ADP said 325,000 jobs were added. Estimates for January vary from 100,000 to about 275,000. This will be the first of the three employment reports and will set the stage for Friday's Nonfarm Payrolls.

The Nonfarm report for December showed a gain of +200,000 jobs and consensus estimates for January are only +125,000. Seasonal workers will have been terminated and that will depress the overall gains.

The ISM Manufacturing report is expected to show a minor gain to 54.9 from 53.9 in December. The ISM Services on Friday is expected to rise to 53.5 from 52.6.

Economic Calendar

There were only a few earnings out on Friday. Chevron (CVX) was one of the largest and it was not pretty. Chevron's production declined from 2.79 mbpd in Q4-2010 to 2.64 mbpd in Q4-2011. The reasons for the decline were higher prices on production sharing contracts, lower than expected production from new projects in the Gulf of Mexico and Angola as well as a third party pipeline rupture that halted production. Chevron also experienced decreased demand in Thailand after the floods. Prices received rose by +25% but that was not enough to offset the production declines.

Chevron also saw losses in its refining businesses as the high prices for oil were not being reflected in prices for refined products. The competition at the street level forced prices lower and reduced refining margins. Earnings declined slightly to $2.58 per share or $5.1 billion, down from $2.64 and $5.3 billion in the year ago quarter.

Chevron has plenty of production in the pipeline. The company is spending $32.7 billion in 2012 to complete production facilities in various locations that will greatly expand its production in 2013 and 2014. Chevron added 1.67 billion barrels of reserves in 2011. That is 171% of its production for the year and that is a very good reserve replacement ratio. Chevron shares declined -2.5% on the news even though most of it was expected.

Chevron shares have strong resistance at $110 but with the major new production coming online over the next three years I expect that resistance to be easily broken and shares to move significantly higher.

Chevron Chart

Ford (F) reported lower than expected earnings as commodity costs rose and results from outside the USA fell short. Losses in Europe increased nearly 400% with worries over the debt crisis keeping consumers out of showrooms. Losses in Europe rose to $190 million from $51 million in Q3. Earnings declined to $1.1 billion or 20-cents per share from $1.3 billion and 30-cents in the year ago quarter. Analysts were expecting earnings of 25-cents. Ford also said the currency exchange rates were a drag on earnings. Ford actually lost $83 million in Asia compared to a $23 million profits in Q3.

Ford Chart

Honeywell (HON) reported earnings of $1.05 compared to estimates of $1.04 but they took a big charge for pension fund costs that pushed them to a 40-cent loss. That compared to a profit of 47-cents in the year ago quarter. Honeywell lowered guidance for Q1 saying earnings would rise +11% to a range of 93 to 98 cents. Analysts were expecting $1.00. The company said weakness in Europe was a big reason but the debt crisis was also weighing on emerging markets. GE, UTX, Ford, etc, have also given the same warnings for 2012.

Honeywell Chart

Friday was Facebook day. The Wall Street Journal reported that Facebook is preparing to file its initial paperwork for a public offering. The IPO is expected to raise as much as $10 billion and value Facebook between $75 to $100 billion. The filing could come as early as Wednesday. All the recent IPOs like Linkedin, Zynga, Pandora and Groupon all spiked on the news because it will attract attention to their space. Zynga will benefit since it depends on Facebook for the majority of its revenue.

Assuming Facebook raises $10 billion it would be about the 15th largest IPO on record. Agricultural Bank of China was the largest at $19.3 billion and Visa was $17.9 billion. At a valuation of $85-90 billion it would place Facebook between Bank America and McDonalds in ranking in the S&P 500. MCD is $101 billion and Bank America $75 billion. At $100 billion in value and 825 million users that would value each user at roughly $125. It takes an average of three months from the filing date to actually price the IPO. That takes longer if the SEC has any questions on things like accounting.

Mark Zuckerberg still holds a 24% stake in Facebook that would be worth $20 billion at the higher valuation level. That would instantly catapult him to the 23rd richest human on the planet. The top four as reported by Forbes are Carlos Slim $74B, Bill Gates $56B, Warren Buffett $50B, Bernard Arnalt $41B. Zuckerberg would be worth more than Google founders Sergey Brin and Larry Page at $14 billion each.

I would be smiling too in his situation.

Despite the lousy earnings, lowered guidance and continuing problems in Europe the AAII sentiment survey showed bearish sentiment fell to 18.9% from 23.6%. There have only been four weeks since 2006 where bearish sentiment was lower. Bullish sentiment rose to 48.4% from 47.2%.

However, Investment Company Institute (ICI), reported U.S. equity funds had outflows of $804 million for the week ended Jan 18th. Another report said domestic equity funds have had outflows for four of the last five weeks. Bond funds had inflows of $5.56 billion, compared to $7.87 billion the prior week. Clearly investors are reluctant to put new money into equities but they have no problems putting large amounts of money into bond funds even at record low yields. This should be a serious warning on market conviction. In theory Bernanke extended his low rate pledge to encourage investors to put money back into the market or into real estate. Investors planning on living on their investments in future years can't afford to earn 1% on a bond because that is less than inflation. That should force money into equities but Europe will have to find a solution before the herd changes direction. One analyst said "investors are talking bullish but investing bearish."

You would think the bearish sentiment would be a lot higher given the events in Europe. Late Friday Germany invaded Greece, at least on a fiscal level. Germany is moving to control Greek spending and the backlash is going to be huge. Reportedly Germany is demanding that Greece turn over control of its budget to a person appointed by the Eurogroup. He will have the task of ensuring budgetary control. He will have the power to a) implement a centralized reporting and surveillance system covering all major blocks of expenditure in the Greek budget, b) to veto decisions not in line with the budgetary targets set by the Troika and c) will be tasked to ensure compliance with the above mentioned rule to prioritize debt service. Greece has to ensure that the new surveillance mechanism is fully enshrined in national law, preferably through constitutional amendment. This language was extracted from the "Assurance of Compliance" rules being discussed for the new 130 billion euro bailout. These measures are required because Greece can't be trusted. They have lied repeatedly about budgets in the past and even produced bogus documents to try and cover up expenditures. They have never met a deadline or an agreed upon austerity promise.

Greece is not going to let Germany or the EU tell them what checks they can write with the priority being debt repayments. Elsewhere in the discussion documents Greece has to shrink its public workforce by 150,000. This is a challenge because public workers are guaranteed jobs for life. They cannot be fired, they have short work weeks and they get to retire earlier than anyone else in Europe. There will be riots.

I have been telling readers for the last year Greece will default. They will tell Europe to take a hike rather than give up their sovereignty for the next 30 years. Late, late Friday night the press was reporting that Angela Merkel now believes Greece will default.

On Saturday an article appeared on Examiner.com by Nick Doms asserting Greece will default. "Greece plans an orderly exit out of the Eurozone according to two sources close to Mr. Papademos, Greek Prime Minister, who spoke on condition of anonymity earlier today.

The sources confirmed that plans are ready to return to a legacy currency given the current circumstances and that such exit would be dealt with, quote 'in as orderly a fashion as possible' … A Greek exit strategy will probably not be announced officially until early March when the EU finance ministers meet."

That should make interesting headlines on Monday. In another article the chairman of a major German bank said he thought he could get the rest of the German banks to chip in enough money to make Greece go away (as in leave the euro). He also thought Portugal would eventually have to leave and he expects to take a haircut on Irish debt.

After Greece defaults Portugal will be next and then Spain. Did you know that unemployment in Spain is 22.85%? For those under 30 the rate is almost 50%. Good thing all their health care is paid by the government.

Spanish Unemployment

On Friday Fitch downgraded Italy, Belgium, Cyprus and Slovenia. Nobody even blinked. There are more downgrades on the way and nobody seems to care. The ECB floated the European boat with half a trillion euros of LTRO three year loans and the interest rate pressure is off for most countries. They are going to do it again in February. The can kicking will eventually end and those without debt insurance will pay a frightful price. With those long term loans that may not happen for a couple years now so Bobby McFerrin "Don't Worry, Be Happy" song applies. Maybe that is why the bearish sentiment is so low.

The U.S. markets may have touched new multi-month highs midweek but they ended the week almost perfectly flat. The S&P was up less than one point for the week. However, support at 1310 went one more day without being tested. There were no gains but there were no losses either. Earnings are failing to impress and most investors don't realize how bad they actually are if you remove Apple and AIG.

There are rumors of a debt deal in Greece on that private sector haircut. They are talking about giving them a 30 year bond with a variable interest rate. We will see if that turns out to be the case or more importantly, will it actually matter?

If the headlines on Monday are about a "debt deal done" instead of "Germany invades Greece" then maybe it will matter for the markets. Otherwise we will be faced with what could be disappointing payroll reports as our market motivation.

The lack of any material reason for equities to rise other than record low interest rates and the falling dollar makes me wonder how much longer this rally will last. S&P support at 1310 followed by 1280 will be the key levels to watch.

S&P Chart - 60 Min

S&P Chart - Daily

The Dow was handicapped on Friday by a -2.63 drop in Chevron and a corresponding drop in Exxon in sympathy. Only two Dow components were positive, AA and UTX. The Dow ran into a brick wall at the 12,750-12,800 resistance level and it has been rock solid. However the declines have been minimal. Friday's -74 points was the biggest drop in weeks but it never came close to support at 12,600. Eventually some headline is going to catch everyone looking the wrong way and we will get a decent drop but so far failing countries and ugly earnings have been unable to produce that event. If 12,600 were to break the next material support is 12,300.

Dow Chart

The Nasdaq Composite chart is not sending any signals. It did hold over 2800 for three consecutive days and that is slightly bullish. However, it is not punching through to test the summer resistance highs as the Dow and S&P have done. Techs may be outperforming for the week but with tech earnings minus Apple at -2.9% for the quarter eventually investors will catch on. Current support is 2800 followed by 2775.

Nasdaq Chart

The Nasdaq 100 big cap index ($NDX) is the strongest index with a breakout to a ten year high and it held the gains. The Facebook IPO should help to keep techs positive even though most of the stocks in the index have no relation to Facebook. Good news creates positive sentiment across the entire sector.

The NDX should return to test that prior resistance at 2415-2425 and a rebound from there to a new high would be very bullish.

Nasdaq 100 Chart

The S&P-100 big cap index ($OEX) is also holding the high ground just under strong resistance at 600. When taken in conjunction to the strong Nasdaq 100 big caps it simply proves fund managers are still using big caps as liquidity deposits. They are nervous about the market and considering the historical trend for late January declines they have good right to be. However, the Russell 2000 closed at a new six month high and that suggests they may finally be rotating some money out of those high liquidity stocks. That is a telling indicator if it continues.

S&P-100 Chart

Confounding the wise the Russell small caps posted a strong gain on Friday and closed at a six month high when the blue chips were weak. They are still a long way from material resistance but strength in this market is bullish. I have been saying to watch for a rotation from big caps to small caps as evidence of improving investor sentiment and Friday was a step in the right direction.

Russell Chart - Daily

I am moving from cautiously bullish in prior weeks to dumbfounded as the market continues to hold its gains with the earnings picture turning so negative and events in Europe taking what seems to be a negative turn. Clearly the desire for any return is motivating some fund managers to put money to work although I don't know where the money is coming from since domestic equity funds have seen outflows in four of the last five weeks.

The only thing I can attribute the gains to is the falling dollar. That is pushing up commodities and apparently equities to some extent. However, with events in Europe worsening the euro could take a serious tumble any day now. If the debt swap deal in Greece gets done soon I am sure that will obscure the bigger picture for a few days and that may give the euro a little more breathing room but as the default talk on Greece and Portugal increases the euro will lose ground. John Mauldin and others are still expecting it to reach parity with the dollar and that would be disastrous for stocks and commodities and represent a 20% gain in the dollar.

Contrary to conventional wisdom I don't think the Fed did us a favor by extending the low rate pledge for another year. Anyone who was thinking about buying a house in 2012 to take advantage of the low rates now has no incentive to hurry. They have a couple years to watch and wait and see if housing prices are going lower. Sometimes a short deadline is a good thing. Extending the free lunch for another 18 months just removed the deadline pressure.

With U.S. growth expected to be around 2.0% for the rest of 2012 and possibly lower given the poor guidance we have seen with earnings, I don't see a strong outlook for equities long term. Obviously that view will change weekly as events unfold but there are so many clouds on the horizon it is tough to see clearly. I would continue to be cautiously bullish based solely on the charts rather than fundamentals and I would look to change that position quickly if we begin to see support levels being tested instead of resistance. The trend is your friend until it ends and a drop under 1310 would be the first warning sign of a detour ahead.

The EOY special is over but we have a few (three) packets left. First come, first served. When they are gone they are gone. 2011 Special

Jim Brown

Send Jim an email

"The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens."
John Maynard Keynes


Index Wrap

Likely Time For a Pause

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The Dow 30 (INDU), a good 'barometer' of the market in recent weeks, looks to be stalled for now near prior key weekly closing highs. The week before last saw INDU Close at 12720, above its highest July closing peak of 12681. Still to come is a possible test of the late-April Closing high of 12810. Moreover, INDU along with the other major indices are likely too overbought on a daily chart basis (and being close to overbought extremes on weekly charts) to continue higher without a correction. Prices could trend sideways for a while, but I mostly am looking for more of a (price) retracement.

The S&P 500 (SPX) and the other major indexes appear to be forming 'Head & Shoulder (H&S) Tops' on their hourly charts as highlighted next with SPX; an H&S top is 'confirmed' if/when the neckline is pierced. The 'Right Shoulder'(RS) is somewhat 'underdeveloped' but is at the right height, it being approximately equal to the top of the 'Left Shoulder'(LS). The neckline would be pierced by further weakness and the odds of that are higher than usual given a bearish price/RSI divergence that's also highlighted on my first chart.

If the neckline is pierced, this doesn't point necessarily to any major sell off; e.g., a 'minimum' downside objective suggested by the hourly chart pattern is back to around 1300-1295. Technical support also looks good for the 1280 area. So, while a top is indicated in more ways than one, it doesn't look to be a MAJOR top at this point. A sell off here IS a key consideration for those holding long calls and who need to protect profits.

While the Nasdaq 100 (NDX) has soared on good-sized moves in the semiconductor stocks and by Apple, our newest biggest corporation, the broader Nas Composite (COMP) is nearing key prior tops and is also inching closer to an 'overbought' extreme on a weekly chart basis. (The daily 13-day RSI has already been deflected from such an extreme.) The odds of a big break out move above the cluster of prior COMP highs isn't great; NOT impossible of course but not highly probable.

OTHER INDEXES:

In terms of Dow theory and the Dow Industrials/INDU, quite near its prior Closing highs, it's unlikely that we'd see the Dow Transportation Average (TRAN) 'confirming' a move to new weekly closing highs anytime soon. TRAN closed Friday at 5344, whereas it's prior closing peak stands at a fairly far-off 5548. I envision higher highs to come and this bull market to continue, but the current rally may have come as far as it can for now.

SOX, the Semiconductor Index, had a major upside breakout move over the past two weeks, but it has reached likely tough resistance in the 420 area; Friday Close: 413. SOX is a bellwether for COMP and NDX.

The XAU Gold and Silver stock index rallied off support in the past few weeks with last week reflecting most of the gains (although still within a downtrend channel), on worries about Europe again. U.S. corporate earnings are the bullish influence and Europe the possible sink hole, although with China still strong, it's not the dominant outside influence it was.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The question with the S&P 500 (SPX) in my mind is whether, now that SPX exceeded prior key resistance, can push on up to next projected resistance around 1350, extending to 1370. The inability for SPX to regain its up daily chart up trendline suggests no, not yet anyway.

Moreover, the hourly chart Head & Shoulder's top pattern highlighted above (in my initial 'bottom line' commentary), suggests at least a minor pullback back to near support at 1300, extending to the 1292-1296 area. Next key support is at the dominant longer-term up trendline, currently intersecting at 1275.

In terms of the overbought extremes seen previously with the 13-day RSI and my CPRATIO 'sentiment' indicator, both have slipped off their highs as seen above. The CPRATIO line often sees peak levels a few days to a week before a top, temporary or otherwise.

The tendency for bullish/bearish extremes to supply early warnings of a trend reversal especially bears watching when price action slows or sets up a reversal type pattern AND when RSI hits a similar high or low extreme.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart is bullish but prices have been recently drifting sideways. A continued such lateral drift will pierce the steep up trendline, currently intersecting around 592. The OEX has traced out what looks like an hourly Head and Shoulder's top and almost identical to the hourly S&P 500/SPX chart seen above in my initial ('bottom line') comments. The odds of a pullback have grown.

Right now the 'correction' is mostly sideways, but profit taking and buyers standing aside could pull the Index down to the 580 area. We can fairly reliably predict that the STEEP uptrend is unlikely to continue given the overbought extreme seen on the 13-day RSI, although RSI can drift lower while prices hold up for some days. Eventually, prices tend to break some the longer RSI diverges. The divergence is showing up initially on the hourly charts, not yet on the dailies. Assuming no rebound from the up trendline, the 21-day average at 586 should be next support, with pivotal chart-changing support at 580.

Resistance is seen at 600-603, then at 607-611, extending to around 615.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) was off a bit this past week, as prices were churning around and a minor top formed on an hourly chart basis. INDU is within a hair's breath of falling further under its well-defined up trendline; INDU closed below this trendline on Friday. The Average looks like it may have reached a temporary top in the 12800 area. It could reach 13000 resistance still on this leg up, but I see more potential for bearish influences in the near-term than bullish ones. 13000-13200 could be seen on a next rally.

We've had a pretty good run here and as with the S&P and the Composite, INDU is quite overbought on a 2-week basis, but isn't quite so extreme yet on a 2-month basis; e.g., the 8-week RSI (not shown here) closed the week at 63.9 and the 75 t0 80 zone is where the Dow tends to get EXTREMELY overbought. A minor pullback ahead would help 'throw off' the overbought extreme of the daily chart and possible set up a next rally that tests resistance at 1300 or a bit higher, such as around 13200.

Seasonally the first quarter tends to see strong gains. This isn't to say that corrections won't happen along the way. A strong Dow bellwether stock is General Electric (GE) and GE is stalled in the low-$19 area; as it trends sideways, its Relative Strength Index has been declining for two weeks, setting up a bearish price/RSI divergence.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart remains bullish as the Index tacked on a further gain this past week although that gain was less than an index point. As with the S&P indices and the Dow, the hourly chart (not shown) suggests a possible minor Head and Shoulder's Top formation, suggesting a retracement, probably minor, possibly a little deeper such as back to the 2700 area.

COMP has kept chugging higher for weeks. A correction is overdue but tops are tricky to time as far as when/where to exit calls, buy puts for a counter-trend downswing, etc. As can be seen from the last significant top in late-October, there was a dip, prices came quickly part way back, then a significant second down leg got underway but the best gains came on the last portion of that down leg. Patience is needed if shorting after a strong uptrend as the market looks like it's never coming down.

The index could advance to initial projected resistance at 2850, or to even more pivotal resistance around 2900. Hard to say, but with key technical support easier to figure at COMP's up trendline, currently intersecting at 2750; further support is seen at 2700, extending to 2685. Major support begins in the low 2600 area.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) index continued to tack on gains this past week but has also traced out a minor Head and Shoulder's Top pattern on its hourly chart as with the other major indexes. If there's going to be a dip, I'd expect it sooner rather than later but any correction may get postponed a few more days.

It's quite hard to predict when 'overbought' stocks or indexes will start falling as funds and investors keep buying dips; rarely does anyone finish buying in just a quick spree. Buy some, buy some more on a strong rise and so on. Selling is more of an unload it all quickly, especially in panic selling situations.

NDX has achieved new multiyear highs; the index hasn't been at current levels since late-February 2001. Whew! I was still in my 105th floor office in the North Tower of the World Trade Center, toiling away at Cantor Fitzgerald.

I've highlighted near resistance at 2465, then at 2500. 2500 is at the top end of an uptrend channel that isn't highlighted on this chart but can be imagined as an exact parallel line to the up trendline that touches at least 3 highs.

Support is noted at the current intersection of the steep up trendline, at 2430. Next support comes in around 2380, which also corresponds to the current 21-day moving average.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

I wrote last week that if I wanted to test the short side of the market, I'd short the Nasdaq 100 tracking stock on an (QQQ)'unleveraged' basis; i.e., a short position in the stock, no put plays, etc and not on margin. The stock has tacked on another .7 in the past week. I'd exit any short positions at 61.6

Those holding calls, long the stock, etc., no one can say this run is over until something gives, such as a trendline. Support implied by the Q's up trendline, is currently at 59.3, with next lower support looking like 58.4 currently.

I've noted overhead resistance at 60.4, which is in an area where the rally couldn't get further sustained traction. Next resistance is the recent intraday high at 60.8, then up in the 62 area.

I don't typically display the Relative Strength Index or RSI on the QQQ chart but of course readings will be nearly to completely identical to the 'overbought' 13-day RSI. So, the NDX tracking stock is at an overbought extreme like the underlying NDX and its RSI hasn't been this high, this extreme, since early last year after an even more prolonged rally. So, of course, markets get 'overbought' and then overbought some MORE at times.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) has been maintaining a bullish pattern of higher highs and higher reaction lows within a bullishly steep uptrend price channel. RUT hasn't traced out the near-term bearish Head & Shoulder's top pattern seen in the hourly charts of the major indexes. This is not to say that RUT won't follow the Nasdaq lower if a correction gets underway in earnest; so far however, no signs of a top.

The Index has traced out a very steep up trendline, which isn't usually sustainable beyond 4-6 weeks typically. Trendline support is noted at 780, with next lower support looking like 767. A close below 760 suggests RUT could see the low 740 area again.

Near resistance is at 800, which I've long thought would be a major target and potential major resistance. Stay tuned on that outcome! Next resistance is suggested at 815, extending to the 820 area.

RUT has hit an overbought extreme in terms of the daily charts and the market may only be a bearish news story away from a correction. At the risk of saying so once again, I'd consider exiting with call profits and unwinding other bullish plays.

Risk to reward on new bullish strategies is not great given the heightened risk of a correction. Still, it's a pretty bullish chart pattern as far as price action since the lows of mid-December. RUT is another of the indexes (such as the DJIA) that has had a terrific 'santa claus', post-santa claus, rally.



GOOD TRADING SUCCESS!


New Option Plays

Rare Earth & Energy

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate, consider these stocks as possible trading ideas:

potential bullish candidates I am watching:

BBBY, UNP, FMC, EMR, CSC, MLM, COO, FDX, and RGR


NEW DIRECTIONAL CALL PLAYS

Molycorp, Inc. - MCP - close: 31.72 change: +1.42

Stop Loss: 29.75
Target(s): 38.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The rare-earth metal miners have gotten a lot of press over the last couple of years thanks to their rocket ride higher in 2010-2011 and their meteoric fall over the last three quarters. Yet now it looks like the industry may have found a bottom. Shares of MCP are breaking out past resistance near $30 and its 50-dma. This stock could see a short squeeze with the most recent data listing short interest at 38.6% of the 51.8 million-share float.

I am suggesting we open small bullish positions at the open on Monday morning but only if both MCP and the S&P 500 index open positive. More nimble traders may want to wait and try and buy another dip near $30 or its 10-dma instead. I do see potential resistance near $35 and its 100-dma but we're going to aim for $38.50 given the chance that MCP does see some short covering.

FYI: The Point & Figure chart for MCP is bullish with a long-term $49 target.

Do not enter position unless MCP and the S&P500 are both positive at the open

- Suggested Positions -

buy the Feb $31 call (MCP1218B31) current ask $1.92

- or -

buy the Mar $35 call (MCP1217C35) current ask $1.42

Annotated Chart:

Entry on January xx at $ xx.xx
Earnings Date 03/08/12 (unconfirmed)
Average Daily Volume = 4.0 million
Listed on January 28, 2012


NEW DIRECTIONAL PUT PLAYS

Cimarex Energy Co - XEC - close: 57.65 change: +0.12

Stop Loss: 60.25
Target(s): 51.00
Current Option Gain/Loss: Unopened
Time Frame: exit prior to earnings on Feb. 15th
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of this oil and gas company continue to underperform. The stock broke down under support near $60 a few days ago. Since then the oversold bounces keep reversing. The larger trend is bearish as well. Plus the Point & Figure chart for XEC is bearish with a $47 target.

More aggressive traders could buy puts now. I am suggesting a trigger to buy puts at $56.75 with a stop loss at $60.25. Our target is $51.00. We do not want to hold over the Feb 15th earnings report.

Trigger to buy puts @ 56.75

- Suggested Positions -

buy the FEB $55 PUT (XEC1218N55) current ask $1.45

Annotated Chart:

Entry on January xx at $ xx.xx
Earnings Date 02/15/12 (confirmed)
Average Daily Volume = 1.0 million
Listed on January 28, 2012



In Play Updates and Reviews

Defense Sector Stocks Underperform

by James Brown

Click here to email James Brown

Editor's Note:

Aerospace and defense-related stocks underperformed on Friday most likely due to budget cut worries. We saw our NOC trade get stopped out.

TEVA was also stopped out. We have removed DLTR and ANF as trading candidates.

Current Portfolio:


CALL Play Updates

Berkshire Hathaway Inc. - BRK.B - close: 79.42 change: -0.24

Stop Loss: 77.75
Target(s): 84.00
Current Option Gain/Loss: -12.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/28 update: Traders bought the dip again midday and BRK.B pared its losses by the closing bell. At this point readers may want to wait for BRK.B to breakout past resistance at $80.00 before considering new positions. I am adjusting our exit target to $84.00 and moving our stop loss higher to $77.75.

We do not want to hold over the late February earnings report.

- Suggested Positions -

Long Feb $80 call (BRKB1218B80) entry $0.90

01/28/12 new stop loss @ 77.75, adjusted exit to $84.00
01/25/12 new stop loss @ 77.45
01/18/12 triggered at $78.75
01/14/12 adjusted entry point strategy to use a trigger @ 78.75
01/13/12 BRK.B gapped lower, negating our entry point. Trade did not open.

chart:

Entry on January 18 at $78.75
Earnings Date 02/27/12 (unconfirmed)
Average Daily Volume = 4.4 million
Listed on January 12, 2012


Cognizant Technology - CTSH - close: 71.33 change: +0.10

Stop Loss: 68.75
Target(s): 76.50
Current Option Gain/Loss: -17.6%
Time Frame: exit prior to the Feb. 8th earnings
New Positions: see below

Comments:
01/28 update: Friday proved to be a quiet day for CTSH with the stock drifting sideways in a narrow range. Readers may want to wait for a new dip or a bounce near the $70.00 level before considering new positions.

Our target is $76.50. We do not want to hold over the Feb. 8th earnings report. FYI: The Point & Figure chart for CTSH is bullish with an $85 target.

- Suggested Positions -

Long Feb $75 call (CTSH1218B75) Entry $0.85

01/24/12 trade opened at $71.05

chart:

Entry on January 24 at $71.05
Earnings Date 02/08/12 (confirmed)
Average Daily Volume = 2.3 million
Listed on January 21, 2012


Express Scripts, Inc. - ESRX - close: 51.44 change: -0.92

Stop Loss: 49.95
Target(s): 57.00
Current Option Gain/Loss: -27.5%
Time Frame: exit prior to February earnings
New Positions: see below

Comments:
01/28 update: ESRX underperformed the market on Friday with a -1.7% decline. Yet shares held short-term technical support at the rising 10-dma. A bounce here could be used as a new bullish entry point. Although if the market drops on Monday we might see ESRX test the $50.00 level.

Earlier Comments:
This stock could see more short covering. The most recent data listed short interest at almost 17% of the 482 million-share float. FYI: The Point & Figure chart for ESRX is bullish with a $75 target.

- Suggested Positions -

Long Feb $52.50 call (ESRX1218B52.5) Entry $2.00

chart:

Entry on January 26 at $52.67
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 6.6 million
Listed on January 25, 2012


Flowserve Corp. - FLS - close: 109.12 change: +0.40

Stop Loss: 105.45
Target(s): 114.50
Current Option Gain/Loss: Feb $110c: -11.1% & Apr$115c: - 7.5%.
Time Frame: 3 to 4 weeks
New Positions: , see below

Comments:
01/28 update: FLS bounced off its Friday morning lows near $108 and closed up +0.4% for the session. This is the second day in a row traders have bought the dip near $108 but I'm not ready to move our stop loss yet. More aggressive traders might want to put their stop loss under the $105.00 level instead.

I am setting our target at $114.50 but cautious traders may want to exit at $112.00 instead. FYI: The Point & Figure chart for FLS is bullish with a $139 target.

- Suggested Positions -

Long FEB $110 call (FLS1218B110) Entry $2.59

- or -

Long APR $115 call (FLS1221D115) Entry $4.00

01/26/12 trade opened on FLS' gap open higher at $109.21.
01/25/12 adjusted entry point strategy to buy calls when FLS hits $109.05, and use a stop loss at $105.45

chart:

Entry on January 26 at $109.21
Earnings Date 02/23/12 (unconfirmed)
Average Daily Volume = 400 thousand
Listed on January 21, 2012


Starwood Hotel & Resorts - HOT - close: 54.36 change: +0.62

Stop Loss: 52.65
Target(s): 57.50
Current Option Gain/Loss: +46.1%
Time Frame: exit prior to earnings
New Positions: see below

Comments:
01/28 update: HOT rebounded off its Friday morning low and recouped a good chunk of Thursday's decline. We only have three days left for this trade. We'll plan to exit on Wednesday, Feb. 1st to avoid holding over earnings on Thursday morning. Given our dwindling time frame I am inching up our stop loss to $52.65. I am not suggesting new positions at this time.

- Suggested Positions -

Long Feb $52.50 call (HOT1218B52.5) entry: 1.67

01/28/12 prepare to exit on Feb. 1st at the close
01/28/12 new stop loss @ 52.65
01/26/12 sold half @ the open. Bid was $2.95 (+76.6%)
01/25/12 prepare to sell half at the open tomorrow morning. bid on our call is currently at $3.20 (+91.6%). We will adjust the exit target on the remainder of our position to $57.50
01/25/12 new stop loss @ 52.40
01/24/12 new stop loss @ 51.45
01/18/12 new stop loss @ $49.75
01/13/12 Triggered on a dip at $51.00
01/10/12 initial entry point did not work. New strategy: buy a dip at $51.00.

chart:

Entry on January 13 at $51.00
Earnings Date 02/02/12 (confirmed)
Average Daily Volume = 2.4 million
Listed on January 09, 2012


iShares Russell 2000 ETF - IWM - close: 79.72 change: +0.54

Stop Loss: 75.45
Target(s): 82.50
Current Option Gain/Loss: +23.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/28 update: Small cap stocks were showing relative strength on Friday and the IWM gained +0.6%. The trend is up but I'm still concerned the IWM might be a little bit overbought. I would not be surprised to see a dip close to the rising 10-dma. I am not suggesting new positions at this time.

Earlier Comments:
You may want to consider a stop closer to the 10-dma instead (currently 75.95). Our multi-week target is $82.50. Keep in mind the $80.00 level might offer some overhead resistance. FYI: The Point & Figure chart for IWM is bullish with a $90 target.

- Suggested Positions -

Long Feb $80 call (IWM1218B80) Entry $1.14

01/19/12 IWM gapped open higher at $78.13

chart:

Entry on January 19 at $78.13
Earnings Date --/--/--
Average Daily Volume = 40 million
Listed on January 18, 2012


iShares Transportation - IYT - close: 95.38 change: +0.79

Stop Loss: 91.75
Target(s): 98.50
Current Option Gain/Loss: Jan$95c: - 100% & Feb$95c: +34.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
01/28 update: The IYT was showing relative strength on Friday with a +0.8% gain and a close over potential resistance at the $95.00 level. We are raising our stop loss up to $91.75.

- Suggested Positions -

Long Feb $95 call (IYT1218B95) entry $1.45
target 98.50

01/28/12 new stop loss @ 91.75
01/21/12 new stop loss @ 91.40
01/21/12 January $95 calls have expired.
01/12/12 new stop loss @ 89.45
01/07/12 new stop loss @ 88.75
01/03/12 IYT gapped open higher at $91.20, above our trigger at $90.75

chart:

Entry on January 03 at $91.20
Earnings Date --/--/--
Average Daily Volume = 582 thousand
Listed on December 22, 2011


Laboratory Corp. - LH - close: 91.32 change: +0.26

Stop Loss: 88.40
Target(s): 94.75
Current Option Gain/Loss: + 86.6%
Time Frame: up to the Feb. 10th earnings report.
New Positions: see below

Comments:
01/28 update: It looks like LH has spent the last couple of days moving sideways and digesting gains from earlier in the week. The $90-89 area should be support. I am raising the stop loss to $88.40.

We do not want to hold positions over the Feb. 10th earnings report. Our target is the $94.75 mark. FYI: The Point & Figure chart for LH is bullish with a $105 target.

- Suggested Positions -

Long Feb $90 call (LH1218B90) Entry $1.50

01/28/12 new stop loss @ 88.40
01/26/12 sold half @ the open, bid @ $2.65 (+76.6%)
01/25/12 sell half at the open tomorrow. Bid on the Feb. $90 call is at $3.10 (+106%).
01/25/12 new stop loss @ 87.90
01/24/12 rival DGX delivers a strong earnings report
01/23/12 trade triggered at $89.00
01/21/12 new stop loss at $86.90. Still waiting for LH to hit our entry point at $89.00.

chart:

Entry on January 23 at $89.00
Earnings Date 02/10/12 (confirmed)
Average Daily Volume = 564 thousand
Listed on January 10, 2012


Lufkin Industries - LUFK - close: 75.37 change: +1.10

Stop Loss: 73.40
Target(s): 82.00
Current Option Gain/Loss: - 30.5%
Time Frame: up to the Feb. 9th earnings report.
New Positions: see below

Comments:
01/28 update: Good news! There was no follow through on Thursday's bearish reversal candlestick pattern. LUFK outperformed the market on Friday with a +1.4% bounce. I'm still a little cautious here. I'd rather see a new rise past $76.50 before considering new bullish positions.

Our target is $82.00 but we want to exit prior to the Feb. 9th earnings report. FYI: The Point & Figure chart for LUFK is bullish with an $85 target.

- Suggested Positions -

Long Feb $80 call (LUFK1218B80) Entry $2.95

01/25/12 triggered @ 76.60

chart:

Entry on January 25 at $76.60
Earnings Date 02/09/12 (confirmed)
Average Daily Volume = 300 thousand
Listed on January 24, 2012


Mohawk Industries - MHK - close: 63.45 change: +0.09

Stop Loss: 61.95
Target(s): 67.50
Current Option Gain/Loss: -51.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/28 update: The intermediate trend for MHK is still higher but short-term the momentum has stalled. Shares have spent a week consolidating sideways. That's not necessarily bad but it's worrisome when the major stock market indices are hitting new relative highs and MHK is not participating. If you look hard enough MHK has a two-week bearish trend of lower highs. More conservative traders might want to consider an early exit. MHK has support near $62.00. We will inch up our stop loss to $61.95. I am not suggesting new positions at this time.

Earlier Comments:
Our target is $67.50 but we do not want to hold over the February earnings report. More aggressive traders could aim higher.

Investors will be interested to note that the most recent data listed short interest at 5% of the 57 million share float. That's not excessive but it's a bit high and could boost any new gains as bears cover their shorts. FYI: The Point & Figure chart for MHK is bullish with a $90 target.

- Suggested Positions -

Long Feb $65 call (MHK1218B65) Entry $2.48

01/28/12 new stop loss @ 61.95
01/26/12 new stop loss @ 61.75
01/17/12 MHK gapped open higher at $63.99

chart:

Entry on January 17 at $63.99
Earnings Date 02/22/12 (confirmed)
Average Daily Volume = 621 thousand
Listed on January 14, 2012


Omnicom Group - OMC - close: 46.52 change: -0.22

Stop Loss: 45.45
Target(s): 49.00
Current Option Gain/Loss: + 8.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/28 update: OMC is still bouncing around the $47-46 area. The trend of higher lows is still in place. Readers might want to start thinking about raising their stop loss.

Our target is $49.00. We do not want to hold over the mid February earnings report. FYI: The Point & Figure chart for OMC is bullish with a $64 target.

- Suggested Positions -

Long Feb $45 call (OMC1218B45) entry $1.80

01/19/12 new stop loss @ 45.45, readers may want to take profits now (+66%)
01/18/12 new stop loss @ 44.75

chart:

Entry on January 12 at $45.75
Earnings Date 02/14/12 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on January 11, 2012


PVH Corp. - PVH - close: 76.70 change: -0.24

Stop Loss: 74.75
Target(s): 83.50
Current Option Gain/Loss: Feb77.50c: -43.7% & Mar$80c: -35.2%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/28 update: PVH has spent the last day and a half in a very narrow range. If the market dips again I would not be surprised to see PVH pull back toward the $75.00 level. I am not suggesting new positions at this time.

Earlier Comments:
The plan was to keep our position size small to limit risk. FYI: The Point & Figure chart for PVH is bullish with a $92 target.

- Suggested Positions - (small positions)

Long Feb $77.50 call (PVH1218B77.5) Entry $2.40

- or -

Long Mar $80 call (PVH1217C80) Entry $2.55

01/24/12 trade triggered at $77.60
01/23/12 trade still not open
new entry point strategy to use a trigger at $77.60, stop loss at $74.75
01/21/12 trade not open yet. try again.

chart:

Entry on January 24 at $77.60
Earnings Date 03/28/12 (unconfirmed)
Average Daily Volume = 867 million
Listed on January 19, 2012


SPX Corp. - SPW - close: 69.57 change: +0.18

Stop Loss: 67.90
Target(s): 74.75
Current Option Gain/Loss: Unopened
Time Frame: up to the Feb. 16 earnings report
New Positions: Yes, see below

Comments:
01/28 update: I need to issue a correction for our new trade with SPW. On Thursday I mistakenly listed our trigger to buy calls at $74.75 while listing our target to exit at $74.75 at the same time. We actually want to use a trigger to buy calls at $70.50 and exit at $74.75.

Friday was a non-event for SPW with the stock trading sideways in a narrow range under resistance at $70.00.

If triggered we will aim for the $74.75 mark but more aggressive traders could aim higher. We do not want to hold over the Feb. 16th earnings report. FYI: The Point & Figure chart for SPW is bullish with an $82 target.

Trigger @ 70.50

- Suggested Positions -

buy the Feb $70 call (SPW1218B70) current ask $2.05

chart:

Entry on January xx at $ xx.xx
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 711 thousand
Listed on January 26, 2012


TJX Companies - TJX - close: 67.37 change: -0.58

Stop Loss: 66.49
Target(s): 68.50
Current Option Gain/Loss:(Jan$65c: +85.0%) & Feb$65c: +57.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
01/28 update: TJX succumbed to some profit taking ahead of the weekend after hitting new record highs on Thursday. If recent action is any indication then we could see TJX dip toward its 10-dma near $66.85 or its 20-dma near $66.08. Just a couple of days ago we turned more cautious on the stock and raised our stop loss to $66.49. Readers may want to go ahead and exit our February calls now. I am not suggesting new positions at this time.

Earlier Comments:
On January 5th, management announced a 2-for-1 stock split payable on February 2nd, 2012.

- Suggested Positions -

Long Feb $65 call (TJX1218B65) Entry $1.75

01/26/12 new stop loss @ 66.49, Consider taking profits now!
01/18/12 adjusted exit target to $68.50
01/18/12 closed Jan $65 calls @ $1.85 (+85.0%)
01/17/12 prepare to exit January calls at close tomorrow
01/17/12 new stop loss @ 64.75
01/12/12 new stop loss @ 63.75
01/07/12 readers may want to take profits now (Jan$65call +90%, Feb$65call +57%)
01/05/12 new stop loss @ 63.25, TJX announced strong same-store sales and a 2:1 split.
12/31/11 new stop loss @ 62.75

chart:

Entry on December 22 at $64.10
Earnings Date 02/23/12 (unconfirmed)
Average Daily Volume = 2.7 million
Listed on December 21, 2011


PUT Play Updates

Deckers Outdoor Corp. - DECK - close: 82.62 change: +0.27

Stop Loss: 85.25
Target(s): 77.00
Current Option Gain/Loss: -27.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/28 update: DECK eked out another gain on Friday but shares are still trading with a bearish trend of lower highs. I am not suggesting new positions at this time. More conservative traders might want to inch down their stop loss.

Earlier Comments:
Our target is $77.00. We want to keep our position size small because any unexpected rally might spark some short covering. The most recent data listed short interest at 14% of the relatively small 37.1 million-share float.

(Small Positions) - Suggested Positions -

Long FEB $80 PUT (DECK1218N80) Entry $3.10

01/25/12 DECK is not cooperating. Readers may want to exit immediately.

chart:

Entry on January 23 at $82.75
Earnings Date 02/23/12 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on January 21, 2012


CLOSED BULLISH PLAYS

Dollar Tree Inc. - DLTR - close: 84.64 change: +0.98

Stop Loss: 83.75
Target(s): 89.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/28 update: I am removing DLTR from the play list, at least temporarily. Shares did outperform the market on Friday with a +1.1% gain. Yet short-term upward momentum has stalled. Long-term the trend is still bullish. I would keep DLTR on your watch list. A breakout past $86.00 or a dip near $80 and its rising 100-dma could both be potential bullish entry points.

Our trade did not open.

Our trade did not open.

01/28/12 removed from the newsletter. trade did not open.
01/26/12 still not open. We want to step back and observe tomorrow. No entry on Friday, Jan. 27th.
01/25/12 still not open
01/24/12 trade did not open. try again.

chart:

Entry on January xx at $ xx.xx
Earnings Date 02/22/12 (unconfirmed)
Average Daily Volume = 1.2 million
Listed on January 23, 2012


Northrop Gruman - NOC - close: 58.71 change: -0.61

Stop Loss: 58.75
Target(s): 64.00
Current Option Gain/Loss: -64.7%
Time Frame: up to NOC's early February earnings report.
New Positions: see below

Comments:
01/28 update: Defense stocks underperformed on Friday most likely due to worries over budget cuts. NOC underperformed its peers with a -1.0% decline. The stock broke down under its simple 200-dma and hit our stop loss at $58.75 in the process. On the weekly chart, this past week's performance looks like a big, bearish reversal pattern.

- Suggested Positions -

Feb $60 call (NOC1218B60) Entry $1.70, exit $0.60 (-64.7%)

01/27/12 stopped out @ 58.75
01/21/12 new stop loss @ 58.75

chart:

Entry on January 19 at $60.34
Earnings Date 02/01/12 (confirmed)
Average Daily Volume = 1.5 million
Listed on January 18, 2012


Teva Pharmaceuticals - TEVA - close: 44.91 change: -0.54

Stop Loss: 44.40
Target(s): 49.50
Current Option Gain/Loss: -49.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/28 update: I could not find any news to explain the relative weakness in TEVA. Shares began to accelerate lower on Friday afternoon as if traders were afraid to hold over the weekend. TEVA dipped to $44.02 before paring its losses but it still underperformed with a -1.1% decline. Our stop loss was hit at $44.40.

(Small Positions)- Suggested Positions -

Feb $45 call (TEVA1218B45) entry $1.50, exit $0.76 (-49.3%)

01/27/12 stopped out at $44.40
01/25/12 new stop loss @ 44.40
01/18/12 TEVA has rebounded. Use it as a new entry point.
01/17/12 Be careful. TEVA hit our trigger and reversed to close back under $45.00

chart:

Entry on January 17 at $45.25
Earnings Date 02/08/12 (unconfirmed)
Average Daily Volume = 5.9 million
Listed on January 14, 2012


CLOSED BEARISH PLAYS

Abercrombie & Fitch - ANF - close: 47.23 change: +1.35

Stop Loss: 46.05
Target(s): 40.00 or 37.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
01/28 update: ANF is not cooperating. Shares continue to bounce and the stock is on the verge of breaking out past technical resistance at its 50-dma. Our plan was to buy puts on a breakdown to new lows but that is unlikely to happen any time soon. We are dropping ANF as a bearish candidate.

Trigger @ 43.40

Our trade did not open

01/28/12 removed from the play list. trade did not open

chart:

Entry on January xx at $ xx.xx
Earnings Date 02/15/12 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on January 23, 2012